1st January 2023 marked 10 years since the direct mutual fund plans were introduced. They have been revolutionary with over 45% of the mutual fund industry’s AUM (Assets Under Management) as of March 2022. The biggest advantage of investing in direct mutual funds is the lower expense ratio.
Even today, frequent investors are unclear of the commission difference paid between regular funds and direct mutual funds.
If you buy mutual funds through an adviser or a distributor, the fund house pays a commission to the middleman for introducing a new investor to their regular plan. This commission is collected by the investor through a fee charged by the AMC as an expense ratio i.e. the fee that the asset management company charges you for managing your money.
As pointed out previously, this is on the higher side for regular plans as it also includes mutual fund distributor commissions.
In direct mutual funds, you cut out the middleman and invest straight to the AMC, thus expenses for direct mutual fund plans are lower. While the amount may appear little, it will compound over time and have a significant impact on your earnings. Direct mutual fund plans are what we offer on Coin
To give you an illustration, this is how the direct and regular plans of Axis Bluechip Fund have fared over the past five years.
The more your investment corpus grows, the more you will end up paying in commissions. If you’re a DIY investor, it doesn’t make sense to invest in regular plans. It is important to keep the costs of your investments low. Costs are the biggest drags on the performance of your investments in the long run.
Take a look at how SIPs would have fared in the same fund.
Let’s say, you invest Rs. 10,000 into a regular mutual fund with a 2% expense ratio. Every day, you end up paying 0.55 paise in fees. While the expense ratio in most direct funds is half or less than that of a regular fund, assume it’s 1%, you end up paying nearly 0.28 paise per day.
A monthly SIP of Rs. 10,000 in Axis Bluechip Fund Regular Plan, which has a 1.59% expense ratio. Here is a calculation of the returns you would have made as of December 30, 2022.
Here’s a comparison of the category average expense ratios for direct and regular mutual funds;
AMFI publishes reports on commissions earned by mutual fund distributors every year, in the financial year 2021-22, MF distributors earned commissions worth Rs. 10,000 crores.
To learn more about investing in mutual funds we recommend you read this module on Varsity: